Market Wire - US Prices Surge Higher, Forcing Yields and the Dollar Upward

Headline US consumer prices rose by more than expected in May, lifting odds on a 50-basis point hike at the Federal Reserve’s September meeting. According to data released by the Bureau of Labor Statistics this morning, the consumer price index climbed 8.6 percent in May from the same period last year, up a seasonally-adjusted 1.0 percent from April. Economists polled by major data providers expected 8.3 percent and 0.7 percent gains, respectively. 

A 3.9 percent month-over-month surge in energy prices added to a 1.2 percent jump in food costs. New vehicle prices ratcheted 1.0 percent higher, and the index for used cars and trucks rose 1.8 percent in May after declining in each of the 3 prior months. 

Services inflation continued to rise, with shelter costs up 0.6 percent, transportation gaining 1.3 percent, and medical care 0.4 percent higher. 

With highly-volatile food and energy components excluded, core prices rose 6 percent year-over-year, up 0.6 percent over the prior month. This was slightly faster than the 0.5 percent expected in markets. 

Two- and ten-year bond yields ratcheted higher after the data hit the wires, and the dollar rose. Federal Reserve officials are widely expected to raise benchmark interest rates by 50 basis points at its June and July meetings, and post-release implied market pricing suggests odds on a similar-sized move in September have risen sharply, nearing 100 percent. The federal funds rate is now seen hitting 3 percent by year end, tilting interest differentials further in the greenback's favour. 

North of the border, Canada created more jobs than expected, and the unemployment rate fell below a record low last month. Data from Statistics Canada showed 40,000 positions added in May, with the jobless rate falling to 5.1 percent from 5.2 percent in the prior month - marking the lowest since the agency began collecting similar records in 1976. 

Average hourly wages grew 3.9 percent on a year-over-year basis, up sharply from the 3.4 percent pace recorded in April. 

Economists had expected a 30,000-job gain, with unemployment flat at 5.2 percent. 

The Canadian dollar climbed modestly on the release, but remains sharply weaker on the week after yesterday’s global market rout sent high-beta currencies tumbling.